In March 2018, President Muhammadu Buhari cancelled his trip to the Rwandan capital Kigali to sign the framework agreement for establishing the African Continental Free Trade Area (ACFTA).
The cancellation was abrupt and we gathered the presidential advance party was already in Rwanda.
Reports said Nigeria had pulled out of ACFTA following protests by labour unions and civil society organizations who claimed the trade pact would open the country to floods of imported goods and commodities.
According to them, this development will harm the local economy and threaten jobs.
What is the African Continental Free Trade Area (ACFTA)?
The ACFTA is a trade deal designed to drop barriers to intra-African trade. It seeks to connect 54 African nations with 1.3 billion consumers and create a single $3.4 billion market. The rationale is easy to appreciate as according to Brookings Institution, ntra-African exports made up only 19% of total trade in 2018, compared to 59% and 69% for intra-Asia and intra-Europe trade respectively.”
In effect, African nations are trading with Asia and Europe but not among themselves. The ACFTA seeks to increase intra Africa trade by eliminating barriers.
The International Monetary Fund (IMF) calls the ACFTA a “potential economic game changer,” What we should note here is the word POTENTIAL. The IMF also said “eliminating tariffs (in Africa) could boost trade in African by 15-25% in the medium term.” The case for the ACFTA is very strong and will boost trade. So, if ACFTA will boost trade and Nigeria is the biggest economy in Africa why are the Nigerian Labour Unions worried? does the ACFTA not open the Ghanaian market to Nigerian beer and the South Africa market to Nigerian banks? The reality is the ACFTA exposes the weak infrastructure position of Nigeria
A free trade agreement simply means if a country have a lower cost of production in her home nation, that nation will gain market share by offering products cheaper than competition. Also, nations can no longer artificially increase prices of imported goods by imposing import duties. In theory, Ghana cannot impose a duty on Innoson cars if Nigeria is the source of those cars. Also Nigeria cannot impose an import duty on textiles from UniWax in Ivory Coast, if those textiles are made in Ivory Coast.
With the fall in artificial fiscal barriers the selling price of Innoson Cars in Ghana are now a direct function of the marginal cost of making a car in Nnewi and taking it to the Ghanaian border. If Innoson cars are cheaper in Ghana than Honda cars manufactured and imported to Ghana from Japan, then Innoson has an edge in gaining significant market share in Ghana, especially because Honda of Japan will pay import duties to import Honda Civics to Ghana while Innoson will not.
HOW WILL THE BUSINESS WORLD REACT TO ACFTA?
If you were the CEO of Honda, what will you do? How can Honda pay import duties and still compete with cars with zero duty? This is very simple. All you need to do is to set up a factory in an African nation to enable you sell cars to Africans duty free. Following the example of Honda of Japan, many other multinationals will also relocate from their home nations and set up base in Africa and avoid tariffs and take advantage of the zero tariffs the ACFTA offers within Africa.
The ACFTA is indeed a game changer because it slowly transform African from a continent that trades individually with the European Union, Americas and China to a continent that trades more within itself (member countries).
So, Africa wins, but Africa is continent and not a country,. Thus we may be tempted to ask that who in Africa wins? Answer? “Those African nations with Infrastructure” will win. The ACFTA means Coca-Cola from the United States will no longer need to open factories in the 54 African nations to avoid regional taxes. Coca-Cola can simply open a mega depot in one African nation with great infrastructure, produce drinks there, gain economics of scale advantages and simply “export” internally to an African region, zero taxes. In effect, if I was the CEO of Honda, I am not just coming to Africa, I am seeking a nation with great ports, 24/7 power, security, and rule of law. All these imply one thing – ENABLING ENVIRONMENT.
Let me be specific, Honda does not need to come to the largest market in Africa, i.e. Nigeria, she can set up shop in tiny but efficient nations like Benin Republic and simply drive in Honda Civics across the borders to Lagos. This the fear of the Labour unions, it a valid fear, but a fear borne out of lack of ideas and inertia.
What if Nigeria offered the CEO of Honda “free power” from the natural abundant gas that is flared? what if Honda was offered a 100% guarantee on repatriation of $ profits without penalty to Honda Japan? What if Honda was told Julius Berger will repair Apapa Port and give them access for free for the next 5 years? Well then, the CEO of Honda will pause and rethink going elsewhere. Nigeria already has the market, it’s a strong case to remain near to market, so Nigeria has a shot. However, if that CEO of Japan reads the papers and sees that MTN was sued for $ repatriation, he reads that Apapa port is at a standstill due to bad roads, he read about “systems collapse” of power supply, then he will go to Benin Republic. ACFTA exposes all African nation, you either swim or sink, Nigeria can no longer hide behind Customs duties to ban and unban, ditto Ghana cannot hide behind “local content” and ban Nigerian goods.
WATCH OUT FOR CHINA
The biggest beneficiary of the ACFTA is China. To the north of Nigeria, the Chinese are building massive industrial cities in Ethiopia. Those factories are on African soil and use African Labour, (with Chinese capital). Ethiopian goods made with very cheap hydroelectric power will soon be flown via Ethiopian Airlines to Lagos duty free!! (think computers and phones made in Ethiopia packed unto a Cargo plane) how will Zinox computer compete? he is making computers in Lagos and buying diesel?
To the West of Nigeria, China Merchant Holdings has a 50% ownership of the Lomé Container Terminal in Togo. The port is now larger than the ports in Lagos with a terminal capacity of 2.2 million TEUs. To the East of Nigeria, the Chinese are building a port in Kribi, Cameroon that will become the biggest deep-water port in the region. The “smaller” nations are the bridgehead through which the Chinese hope to link Africa to the Silk Road network and subsequent deep economic integration with America.
The answer to these moves by China and other African nation is not to erect barriers but to go out and seek investment capital and also develop infrastructure for example, build massive ports all along the coast of Nigeria, build rails and excellent roads to connect the hinterland an fix the on and off power supply situation. In summary, prepare.
With ACFTA Nigeria can either become a buyer of goods made in Benin Republic and Ethiopia or become the “Factory of Africa” deploying her massive army of young and English speaking population backed by clean gas to power industrialization on the continent. .The proverbial train has left the station. With or without Nigeria it will get to its destination.